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Medicaid Eligibility Rules (Part II) This
two-part article provides a road map to current Medicaid eligibility
law. Part II, below, describes a variety of
planning strategies and opportunities to help a tax adviser counsel
elderly individuals and married couples, as well as concerned members of
their families. It also discusses various pitfalls, including
state law variations to which advisers must be attuned. Terry W. Knoepfle, J.D., CPA
For more information about this article, contact Prof. Knoepfle at Terry.Knoepfle@ndsu.nodak.edu.
Executive Summary
This two-part article provides an analysis of Medicaid eligibility rules and planning techniques. Part I, in the May 2003 issue, examined the critical rules on timing a Medicaid application, transferring assets to trusts to preserve family wealth and understanding the tax consequences of asset transfers and the potential liability of the Medicaid applicants adviser. Part II, below, considers several other strategies available to protect an individuals assets in the event of Medicaid assistance, and a number of additional techniques particularly suitable for married couples.
Planning Techniques for Singles Converting to Exempt Assets By converting nonexempt assets (such as cash) into exempt assets, an individual can protect his or her assets from being deemed resources that will restrict Medicaid eligibility. Under 42 USC Sections (Sections) 1396r-5(c)(5) and 1382b(a), an individuals exempt assets include, among other items:
Exempt assets are categorized by both Federal and state law, so the specific exemptions and amounts vary from state to state. An individual can convert liquid assets into an exempt residence asset without having to buy a more expensive new home. For example, he or she can improve a residence by installing a new roof, heating or air conditioning system, kitchen or bathroom. He or she can also make repairs or pay down the mortgage. In addition, the individual can purchase other exempt property (e.g., an automobile or a burial plot). Some states, however, limit the value of the exempt automobile to a set amount. Also, an individual can prepay bills (e.g., expenses for estimated income taxes, real estate taxes, insurance premiums or utilities). However, the true value of exempt property is reduced by the real possibility of collection by the state from a Medicaid recipients estate.
Using a Split Transfer A split transfer (a 50/50 split) offers a way for an individual to shorten his or her ineligibility period without having to gift away all of his or her property before the 36-month lookback period. Because most individuals cannot anticipate that they will need nursing home care 36 months in advance, they do not want to make large gifts based on the mere possibility of a need for future nursing home care. More commonly, individuals discover that they need Medicaid assistance when they have fewer than 36 months in which to accomplish their Medicaid planning. Under the 50/50 split-transfer strategy, the prospective Medicaid applicant gifts half of his or her property during the 36-month lookback period, and retains the other half. The gift counts toward calculating the ineligibility period. The applicant then spends down the retained assets. In most cases, the ineligibility period will be half of what it would have been had the applicant gifted his or her entire property.
If L had instead gifted $240,000 to M on June 1, 2002, his ineligibility period would have been $240,000/$4,000 = 60 months from June 1, 2002, and M would have inherited a house subject to a $120,000 mortgage. Ms net inheritance is the same, because the mortgage liability offsets the extra funds. By using a split transfer, L can cut his ineligibility period in half. From the $120,000 M received, she pays for Ls nursing home care only during the period of ineligibility, through Nov. 30, 2004 rather than May 31, 2007. The split-transfer technique is a conservative approach that offers a substantial savings in assets (net of medical care expenses) available to pass on to heirs. However, the 50/50 formula will often need to be adjusted to account for increases in nursing home costs and other factors, including any income an individual receives.
Compensating Family Members for Caregiving Many families try to shift assets from the prospective Medicaid applicant to other family members as compensation for prior services (such as providing care). An individual can pay reasonable compensation to family members for providing care, but the debt must be a valid one. A New York court16 denied the expense when a debt was a sham arrangement to transfer funds away from the Medicaid applicant, and it did not have the indicia of a bona fide loan. However, a Connecticut court permitted an expense when the individual and his relative had a valid written agreement to pay for the care.17 Generally, such an arrangement is embodied in a written contract that may provide either for periodic payments or a lump-sum payment to a caregiver. A lump-sum payment under such a contract is not subject to either gift or estate tax, but the caregiver must pay income tax on the payment.
Protecting the Home An individuals home often represents the bulk of his or her savings over a lifetime. As was noted above, although a residence is an exempt asset excluded from calculating Medicaid eligibility, a state can impose a lien on an individuals residence for Medicaid expenses paid, but not if the individual reasonably intends to return home. For an individual residing in a nursing home who requires constant care, the state may argue under Section 1396p(a)(1)(B)(ii) that the individual cannot reasonably expect to return home.18
Using a Power of Attorney One of the simplest devices for Medicaid (or any estate) planning is a financial power of attorney (POA), in which an individual (the principal) designates another person (an attorney-in-fact) to act in his or her place for financial purposes. A POA may be limited to a specified action and/or period or it may last for the rest of the principals life. In any case, it ceases to operate no later than the principals death. The POA language should grant specific powers, not just general powers. Often, institutions insist on a specific power before acting as directed by an attorney-in-fact. For Medicaid planning, a well-drafted financial POA should give the attorney-in-fact the specific power to make gifts and otherwise plan for the estate. For example, the attorney-in-fact should have the power to make maximum use of the $11,000 per-year gift tax exclusion and to transfer assets before the 36-month lookback period. In some circumstances, as discussed earlier, a gift during such period will also be beneficial. It is very important for the individual to state his or her intention to continue to use the residence and to return to it if ever institutionalized. Under Section 1396p(a)(1)(B), the individuals residence is exempt from Medicaid liens as long as an institutionalized person intends to return home and the state fails to prove otherwise. The POA is one way an individual can state such intention. In addition to the more general financial POA, another useful estate planning tool is a healthcare POA.
Disclaiming and/or Disinheriting Property A disclaimer is a written statement by a prospective heir (or devisee) that he or she does not want to inherit property. The decedents property is then distributed as if the prospective heir had predeceased the decedent. This method is often used to pass property from an individual in a high estate and gift tax bracket to a lower-bracket individual. Under Section 1396p(e)(1)(A), an individuals assets include any income or resources which the individual or such individuals spouse is entitled to but does not receive because of action by the individual or such individuals spouse. As a result, Medicaid counts any disclaimed property as an individuals available assets. Similarly, a will that disinherits an institutionalized spouse will also cause an ineligibility period for Medicaid purposes. Thus, a disclaimer or disinheritance is generally not effective for Medicaid planning. One possible way to mitigate this problem may be for the community spouse19 to leave the institutionalized spouse only the statutory minimum share. In any event, the adviser should assess whether the beneficial estate and gift tax effects of a disclaimer or disinheritance outweigh the effect on Medicaid eligibility.
Retaining a Life Estate in Real Property A life estate in real property is a type of ownership in which a life tenant owns the property during his or her life and a remainder interest holder owns the property free and clear on the life tenants death. The creation of a life estate is a transfer subject to the 36-month lookback period.
As the above example shows, an individual may be better off maintaining the home as an exempt asset, rather than carving out a life estate. However, unlike the home itself, the life estate may not be subject to a Medicaid lien or estate recovery on the Medicaid recipients death.
Deducting Medical Expenses Another approach is for a potential Medicaid applicant to transfer all of his or her assets to a family member on the condition that the latter use those assets to pay for the applicants eventual nursing home costs. The family member can then deduct those costs as a medical expense, assuming he or she pays more than half of the nursing home residents support and the claimed medical expenses exceed 7.5% of adjusted gross income. The potential benefit of this approach to the donee family member is even greater if the Medicaid applicant can delay becoming institutionalized, resulting in a shorter penalty period.
Using a Life Insurance Trust A life insurance trust is an irrevocable trust that owns a life insurance policy on an individuals life. The policy benefits are usually payable to the trust; the trust grantor usually designates the beneficiaries. If a Medicaid applicant owns a life insurance policy on his or her life, he or she can transfer the policy to a life insurance trust to insulate the proceeds from Medicaid recoupment.
If an individual creates a life insurance trust at least 60 months before applying for Medicaid, he or she can use a life insurance policy, together with an irrevocable trust, to transfer a significant amount of money to heirs.
Planning Techniques for Married Persons The planning techniques for married persons include all of the techniques for single persons, plus others described below.
Maximizing the CSRA The maximum amount of assets that a community spouse may retain is called the community spouse resource allowance (CSRA). The CSRA varies by state, from a minimum of $18,132 to a maximum of $90,660 in 2003. Under Section 1396r-5(g), this figure is tied to the Consumer Price Index and is adjusted annually. Under Section 1396r-5(f)(2) and (g), the community spouse may retain up to one half of the couples assets, but not more than the states CSRA and not less than the $18,132 Federal minimum. Some states, such as Alaska, California, New York and North Dakota use $90,660 as the minimum, which is the highest minimum permitted (i.e., in these states, the minimum is the same as the maximum). The adviser should determine the CSRA figure for the state in which he or she is located. Under Section 1396r-5(f)(2) and (g), the CSRA is calculated by taking the greatest of (1) the minimum set by the state; (2) the lesser of $90,660 or one half of the couples total non-exempt assets; or (3) the amount transferred by a court order or established by a fair hearing.
Any excess resources over the CSRA are considered Medicaid available under Section 1396r-5(c). Exempt assets are not counted. According to 20 CFR Section 416.1202(a), the IRA and Keogh accounts of one spouse are generally not considered resources available to the other spouse. However, the New Jersey Supreme Court has held, in spite of this regulation, that a husbands IRA is a countable asset for the purpose of determining his wifes Medicaid eligibility when the wife enters a nursing home, but the husband remains in the community.20 Retirement funds are generally not countable assets if the retiree can elect either a lump sum or a periodic payment and he or she elects the latter. Several strategies exist for maximizing the amount of assets in the snapshot of each spouses assets taken on the institutionalized spouses first day of care. One of these strategies is to postpone debt payment and delay major expenses (such as home repairs) until after the first day of institutionalization. This includes postponing any spend-down of resources. In addition, a couple can have the community spouse take out a loan on an exempt asset (such as a home equity loan on their principal residence) prior to institutionalization to increase total assets. The community spouse can then later pay back the loan as part of his or her spend-down. If the couples assets equal or exceed twice the CSRA, the above techniques for maximizing the snapshot may not be needed. As a result of the snapshot taken of each spouses assets on the first day the institutionalized spouse enters the nursing home, the resources of the community spouse acquired after the first day of institutionalization do not count as available resources. After institutionalization, the institutionalized spouses assets should be used to pay for his or her care. In addition, the community spouse should hold title to all assets acquired after the snapshot is taken. If the CSRA is greater than the community spouses assets, Section 1396r-5(f)(2) provides that the institutionalized spouse may transfer sufficient assets to the community spouse to bring the community spouses share up to the CSRA. Because the institutionalized spouse may be too ill to make such a transfer, the adviser should counsel the spouses, as early as possible, to exercise a financial POA, as described earlier. Provided the POA includes the power to make gifts, the attorney-in-fact (usually the other spouse, but sometimes the individuals child or trusted friend) can make a gift to bring the community spouses share up to the CSRA. However, if the community spouse requires long-term nursing care, the CSRA will no longer apply; his or her assets will have to be substantially reduced to qualify for Medicaid benefits. Often, the best Medicaid planning will conflict with the best estate tax or income tax planning. For example, if an institutionalized spouse transfers assets to a community spouse or other donee to avoid a Medicaid lien, the community spouse or other donee will lose the advantage of a stepped-up tax basis for the asset at the institutionalized spouses death.
Using the Community Spouses Income Allowance Under Section 1396r-5(d), the community spouse is entitled to income up to the minimum monthly maintenance needs allowance (MMMNA). The MMMNA is set by each state and ranges from a minimum of $1,493 to a maximum of $2,267 per month for 2003. This amount is adjusted annually for inflation. Section 1396r-5(e)(2)(B) provides that the community spouse has a right to a fair hearing if there is exceptional hardship that justifies a higher figure. If the community spouses income is less than the MMMNA, he or she may obtain a deduction from the institutionalized spouses income to bring his or her income up to the MMMNA. Alternatively, under Section 1396r-5(e)(2), the community spouse may request a fair hearing to increase his or her CSRA (i.e., by transferring income-earning assets from the institutionalized spouse). Some states require that the institutionalized spouses current income be transferred first to the community spouse before any income-earning assets, which reduces the opportunity to protect family assets through a transfer. The definition of income can also vary among the states.
Creating a Testamentary Trust Under Section 1396p(d)(2)(A), a community spouse can create a testamentary trust without jeopardizing the institutionalized spouses Medicaid eligibility. In addition, the community spouse may have to leave the minimum statutory share to the institutionalized spouse. However, advisers must draft and administer trust provisions carefully to avoid payment of income or principal directly to the institutionalized spouse. Thus, payments from the trust should be made directly to third parties. In any event, advisers should consult applicable state law for any restrictions on the use of such trusts for Medicaid eligibility purposes.
Terminating the Marriage A community spouse can divorce the institutionalized spouse to insulate his or her income from being deemed available to the institutionalized spouse. The divorce will also insulate the community spouses assets from Medicaid. This planning technique is rarely used; it generally applies only to couples with significant assets who cannot obtain long-term care (LTC) insurance to cover a prolonged period of nursing home care.
A qualified domestic relations order (QDRO) is an order issued as part of a divorce proceeding that divides up retirement plan assets. A QDRO does not disqualify a retirement plan, under Secs. 401(a)(13)(B) and 414(p). Thus, a distribution can be made under a QDRO (and possibly rolled over into an IRA), so that each spouse will have separate retirement plans on divorce.
Divorce as a Medicaid planning tool has obvious drawbacks. First, there are the emotional and psychological factors; marriage and divorce are more than just economic arrangements. Second, there is the loss of the marital deduction. However, because Medicaid has a claim against the estate, the net estate most likely will not be large enough to be subject to estate tax. In the event a couple does decide to divorce to preserve their collective assets, each should have a separate attorney. Otherwise, if a guardian ad litem is later appointed for the institutionalized spouse, the guardian may have the right to void the divorce judgment and its property division. The divorcing couple will likely want to transfer a greater share of marital assets to the community spouse. Some states (e.g., New York) require specific written reasons for an unequal property division.21 If one of the reasons given for distributing property to the community spouse is to minimize Medicaid-available assets, the court may balk at approving the proposed property distribution. Thus, non-Medicaid reasons should be found for any unequal asset distribution.
Miscellaneous Planning Techniques Transfer home to community spouse: The home is an exempt asset. However, as discussed above, it may be subject to a Medicaid lien and estate recovery. Also, a sale of the home will convert the exempt home into Medicaid-available funds. If, however, the institutionalized spouse transfers his or her interest in the home to the community spouse, the latter can later sell the home. The conversion of the exempt home into nonexempt cash will take place after the Medicaid snapshot has been taken, so the funds should not be Medicaid-available, although they may later be subject to estate recovery. Convert cash to exempt assets: As discussed above, this is a useful technique for all individuals. Married individuals can convert the institutionalized spouses assets into exempt assets, while leaving the community spouses assets liquid. Purchase an annuity: A couple may purchase an annuity for a community spouse to bring his or her income up to the MMMNA. If this is a transfer for full and fair consideration, it may not affect Medicaid eligibility.22 In addition, the annuity contract should be irrevocable and without a cash surrender value. However, caution is needed, as states tend to attempt to exercise estate recovery on annuities. Plan for terminal illness of a community spouse: Depending on an individuals particular medical problems, one spouse may require extended nursing home care, while the other may be terminally ill, but not require such care. In that case, it is important to try to divert the community spouses assets from the institutionalized spouse. The community spouse may use a testamentary trust (described earlier) to restrict the availability of funds to the institutionalized spouse. Also, the community spouse should change all beneficiaries on insurance policies and retirement plans to a party other than the institutionalized spouse. Finally, the community spouse should change all joint bank accounts, stock accounts, etc., to remove the institutionalized spouses name. Use joint bank accounts: Some individuals set up joint bank accounts with spouses or friends to facilitate banking as they become older. Section 1396p(c)(3) treats any withdrawal by the community spouse from a joint bank account owned by the institutionalized spouse and the community spouse as a transfer of assets for Medicaid purposes. As long as the funds are used solely for the institutionalized spouse, a withdrawal will not be considered such a transfer. Otherwise, the withdrawal is deemed a transfer subject to the 36-month lookback period.
Conclusion Advisers have many opportunities to preserve a clients family assets when LTC is required. Despite unconstitutional attempts to legislate against Medicaid planning, many clients will benefit by properly timing a Medicaid application, knowing the effect on Medicaid eligibility of transfers made during the lookback period, and understanding which assets are exempt. As with any estate planning, advance preparations are the most successful. In addition to the techniques described, clients should explore various LTC insurance plans. Advisers should caution clients about plans that do not provide for inflation or are insufficient for the expected cost of LTC. Also, the plans cost is important. If a client waits to purchase the insurance until he or she needs LTC, the insurance may be very expensive (or even unattainable). Advisers should be aware that the Medicaid rules change often; state variations are common and rule changes may even be retroactive. Further, they should explain to clients the adverse income, gift and estate tax aspects of Medicaid planning and allow them to make an informed choice as to each planning technique. |
